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Ministry of Finance and Economy
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Regulation on loan rates had been abolished during ’97-’98 financial crisis
The Ministry of Finance and Economy recently decided to resurrect a former law for setting limits on interest rates, according to a ministry official. The ministry had previously objected to the revival of the law, which applied an interest rate cap to loans given not only by financial institutions and loan companies, but also to loans between individuals, as well. The law, in place since 1962, was abolished during the Asian financial crisis in 1997-98 at the request of the International Monetary Fund (IMF). The current cap on loan interest rates - currently set at 66 percent annually - applies only to financial institutions and loan companies. On January 14, an internal official said that the Ministry of Finance and Economy had decided to resurrect the law in order to try to lower money lenders’ interest rates in South Korea, and had requested consultations with the Ministry of Justice regarding reinstating the legislation. The government decided to change its position and resurrect the law due to the high level of personal debt in South Korea, which is largely due to high interest rates, said the ministry official.Bills that would resurrect the law, submitted by Rep. Lee Jong-kul of the ruling Uri Party and Rep. Sim Sang-jeung of the Democratic Labor Party (DLP), respectively, are pending at the National Assembly’s Legislation and Judiciary Committee. Rep. Lee’s legislation would have the rate capped at less than 40 percent annually and Rep. Sim’s ceiling would be below 25 percent. The finance ministry had previously maintained that resurrection of the law would spur moneylenders into underground operations that would then charge unmitigated interest rates to those with poor credit who cannot use regular financial institutions for loans. This situation already occurs, but the ministry feared reinstating the law would greatly increase the prevelance of such illegal lenders. The finance ministry has apparently changed its position due to public pressure and the National Assembly’s moves to introduce related legislation. Even though the current ceiling of money lenders’ interest rates is 66 percent, the actual annual average rate exceeds 200 percent due to inefficient regulation by authorities. In South Korea, 5.6 million people currently hold a loan with a private moneylender. Regarding the time frame for a related bill to be passed to resurrect the law, the finance ministry said it has not yet hammered out the details. A ministry official said that it plans to discuss the matter with the Ministry of Justice. Please direct questions or comments to [englishhani@hani.co.kr]
